October 15, 2021Money Economy In the news News Trending Weekly update Weekly commentary Annual commentary
What's Happening Today - Oct. 15
Well that was a much more pleasant week in the markets! The TSX is exploring new highs and the DOW isn’t too far behind.
In economic news, employment is back to its pre-Covid level, but we were not quite at full employment when the pandemic hit. Nor does a restoration in the number of jobs get us back to the pre-pandemic jobless rate, given population growth. Hours worked look decidedly weaker than the jobs count, consistent with Canada’s significant underperformance in real GDP growth versus the US over the Covid period. Higher oil prices will fuel both inflation and some nominal GDP growth for Canada. But this isn’t a return to the glory days for Canada’s energy sector contribution to real GDP. Mega-projects are nowhere in sight, and we’ll need a sustained period of firm prices to rekindle a capital spending boom. As for inflation, Monday’s business conditions survey will show that Canadian companies are feeling its sting on input costs and passing some of that on. But it’s not a question of whether “transitory” means one quarter or one year. It’s what’s causing it. If, as is the case, it’s mostly from constraints on supply that are tied to Covid-related shutdowns, the cure will come from vaccines around the world and time to rebuild inventories, not from slowing the economy with higher interest rates. The time for rate hikes will come, but not until demand is overheated.
Looking down south, it’s U.S. earnings season, and banks earnings have thus far beaten expectations. In the wake of U.S. equities having their best one day rally since March, and with Asian and European bourses trading higher, the VIX index looks set to drift back towards early September lows. Immediate inflation concerns have dissipated despite oil pressing towards fresh seven year highs. For now the Saudis appear to be pushing back against the notion of OPEC+ upping production levels to cap price gains. President Biden and key Democratic lawmakers continue debate the President’s plan to ‘’build back better’’ strategy. With just over a year until the mid-terms, a sagging approval rating underlines a narrowing window for action and the White House appears keen to wrap up negotiations. Speaker Pelosi and other key Democratic moderates appear willing to scale back the bill to focus on a handful of well-funded programs that can be quickly implemented. Such a scenario would allow the Democrats to underline their accomplishments in the 2022 mid-term campaign. The progressives are intent on maintaining a large package, even if programmes are partially funded or expire after only a few years.
Meanwhile, over in the UK, Brexit Minister Lord David Frost is set to visit Brussels today as the two sides begin the latest round of negotiations as regards adjustments to trade arrangements in Northern Ireland. The EU have offered a number of trade concessions, more than seemed possible only several months ago. However, there remains key areas of disagreement, notably in relation to the role of the European Court of Justice. The UK wishes to negotiate a whole new protocol, the EU to merely adjust the previously agreed regime. Talks are expected to go on for up to a month, the risks of a breakdown are not immaterial. Under such circumstances leading EU members are intent upon being prepared, including drawing up tough retaliatory measures should the UK trigger the dispute mechanism, Article 16.
In Asia earlier this week, Peoples Bank of China Governor Yi Gang told G20 central bankers that Chinese inflation is moderate overall. However, in view of PPI reaching levels not seen since 1995 questions marks over the degree of price pass through are set to persist. However, it would appear that the PBoC believe that the PPI spike should slow around year-end, hence they also support the inflation is transitory mantra. Ahead of the release of Q3 GDP data on Monday the market will be listening closely for policy clues from the PBoC Governor when he appears on a panel with BoE Governor Bailey and heads of the IMF and BIS at the Group of 30 International Banking Seminar. That the central bank view the risks from Evergrande as controllable points towards the theory that real estate contagion fears should prove limited.
Down under in Australia, the announcement by New South Wales regarding the re-opening of its borders from 1 November is likely to further enhance national re-opening optimism. Allowing visitors from outside of the country comes as the state is set to exceed the 80% vaccination threshold this weekend. Re-opening the regional economy ahead of the key tourist season should boost revenue flows, in the process providing something of a template for the rest of the country. While in New Zealand, the graduated re-opening of the economy encouraged manufacturing PMI to return to expansionary territory in September. Although the 11.7 point gain was significant the overall index remains well short of the 63.8 cyclical high seen back in March. Only when lockdown restrictions are fully eased in Auckland can we expect a return to previous highs. Ahead of the release of Q3 CPI, RNBZ Deputy Governor Bascand has warned of the risk of inflationary pressures becoming more persistent. With headline annual CPI expected to reach 4.2% in Q3, we have not seen a reading above 4% since 2011, we should expect the market to continue to price in 25bp of tightening at the 24 Nov policy meeting.
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